Guest blog: VAT recovery can benefit homecare providers

Guest blog from UKHCA commercial members Kieran Lynch

Kieran Lynch managing director JOCK WAUGH talks about the impact of indirect taxation on the social care sector and how, by making some changes to how contracts with public funding bodies are managed, homecare providers can join their care home counterparts in legitimately claiming back VAT expenditure in respect of services supplied to publicly-funded clients.

Operating a homecare business, or a chain of homecare businesses, is very different from running a care home, or a group of care homes, but we all know there is lot of common ground: both enterprises provide the same services, albeit in different settings, to much the same client groups. Both have the same regulator, many offer their services to both publicly-funded and privately-paying clients, and both face similar staffing and recruitment challenges.

And while homecare operators do not have to administer and manage property maintenance issues or hotel and catering services, there is still a significant overlap in the areas of human resources, business and financial administration, which is why many social care providers run homecare services alongside their care home operations. Recovery of Value Added Tax paid on operational costs incurred as part of providing services to publicly-funded clients is one area, however, in which the care home sector has been more active, even though the same potential benefits are available to homecare providers, albeit on a smaller scale.

Since it was introduced in 1973, when Britain joined the European Union, VAT has been a significant headwind for care home operators and homecare providers alike. Care fees were made VAT-exempt, which meant they could be kept lower than they otherwise might be, but it also meant operators of care services could not claim back VAT paid as part of their trading costs, which other business operators are able to recover. This has been costing the sector over £600 million annually.

Early last year I wrote to Chancellor Rishi Sunak, suggesting that, as the post-Brexit United Kingdom was no longer tied to EU tax rules, there was now an opportunity for the UK to shape its own VAT agenda. As part of this proposed reform, I suggested that social care providers should no longer be categorised as VAT-exempt but instead be zero-rated. This, I argued, would enable care providers to recover VAT on their running costs.

A week later a response arrived from the Chancellor’s office saying the Government had “no plans to review the VAT treatment of these services at present” and that it had addressed the “short term pressures” on the sector by extra grants to local government in the recent Spending Round.

That fits with their political agenda – they want to maintain individual fee negotiations between providers and unitary authorities – to keep the attrition between care providers and local government as a buffer between the sector and the Treasury.

Where the ideal solution to that might be a zero-rating on care fees, instead of an exemption, the Chancellor’s office’s response to my approach makes it clear that the Government does not see changes to tax legislation as being a part of future reform of social care funding, and this in what has been probably one of the most testing times for providers in recent years, with all the demands which have been placed on them in terms of infection control and protective equipment, along with staffing and recruitment.

Kieran Lynch and other VAT specialists have identified a means by which care providers can be enabled to claim back part of their VAT expenditure within the existing legislative framework, whether they are operating care homes or homecare services and we are now in a time where indirect tax, which has always been seen as a burden, has become a solution.

If we look at the legislation as it has been drafted (and it may be argued that this was no accident) we can see that there is scope for care providers who provide services to publicly-funded clients to enjoy partial VAT recovery.

By bringing together the Care Act 2014, which doesn’t compel public funders such as local authorities to contract with a regulated entity, and applying that into Group 7, Schedule 9 of the VAT Act, operators of care services can legitimately structure themselves to enjoy some level of VAT recovery.

Ironically enough, the origins of this option stems back to around 2013, when a top Four accountant was contracted to a number of large local authorities in a drive to make efficiency savings. They saw an opportunity to use the VAT position as a care fees negotiation chip, so they said to care providers ‘if you keep your fees at such or such level, we’ll let you do your VAT recovery with us’. This, effectively, was the start of restructuring to enable care providers to recover VAT.

Both the Treasury and HMRC appear to be content that care providers are able to recover VAT in this way. When Kieran Lynch helps a client to go down this route, it is standard practice for us, at the very start, to write to HMRC, explaining exactly what is being proposed, and why.

Essentially, we first seek their approval, which they inevitably grant. We are often asked what would happen if, despite the Government’s stated dismissal of VAT reform in respect of social care, it then reviewed its stance, as governments have been known to do. Well, if we take a scenario where government decided to change the Care Act 2014 and/or the VAT Act, the principle of legal certainty would come into play and the changes would have to be implemented from a future date with a transition window which would allow care providers time to revert to invoicing as a regulated entity, but the likelihood of that is extremely slim.

While the care sector has been vacillating over the issue of VAT recovery for three or four years, it appears the added financial pressures caused by the Covid-19 pandemic has given its implementation an added impetus. The planning has been of great interest to franchisors of homecare businesses – it adds value in a number of ways and assists the individual businesses in being competitive.

The ongoing cash benefit is just one aspect of it; we are seeing quite a lot of acquisition activity in the homecare sector and VAT recovery is becoming a real tool in terms of adding value; a homecare operator without the planning in place can be bought, the scheme put in place, and then EBITDAR goes up, and with it the value of the business as a whole. And the planning can stay with the entity, even if it’s sold-off later on as a share purchase, so it has a wider appeal.

Local authorities also appear relaxed about the arrangements once doubts about contracting with an unregulated entity have been addressed. Whatever VAT a care provider charges a local authority, they recover on their VAT return, claiming it back from central government. This is further evidence of central government bringing money back into the sector in full knowledge of the mechanism being used, so it’s a passive means of shoring-up the sector without getting into commitments on fee incomes.

Feedback so far on what would happen with the saving is along the lines of assisting in supporting the correct wage levels for the retention and attracting the correct staff. It has taken some time, however, for both care providers and local authorities to accept that restructuring their contractual arrangements could enable the former to partially reclaim their VAT expenditure.

At the outset there was a lot of head scratching going on but the dissenters are far fewer now and it is increasingly regarded as standard practice. Providers are, however, sensitive to commissioners’ views and how VAT recovery planning will be viewed in the tendering and re-tendering context – we have had it confirmed from numerous commissioners that VAT recovery does not affect the tendering process. Some providers have even called their own commissioner to have the same confirmed.

I was in a meeting very recently with two councils in Scotland who had been previous dissenters; they were now saying ‘we just need a document putting in place, a guarantee between parent company and subsidiary, and we’re good to go on this’.

I think there is some recognition that historically the indirect tax system has placed disadvantages on some classes of care providers and not on others. A classic example of this is the Kingscrest ruling, which only applied to commercial operators and not-for-profit operators were unable to benefit in the same way, whereas this model of VAT recovery is a whole sector solution.

So, whilst VAT has always sat uneasily with social care, it now has a significant role to play in its recovery and sustainability, and although grants may come and go, this indirect tax system has been around for some time. Homecare operators could do much to ensure their continued sustainability by taking-up the VAT recovery option.”

For more information about Kieran Lynch visit their website.

UKHCA can accept no liability for advice, services or products offered or provided by third parties. Inclusion on this blog does not imply endorsement by the Association of the opinions contained in the blog.